Surprise, surprise: Americans hold on to their paychecks

Money, it turns out, doesn’t necessarily burn a hole in our pockets. Researchers have found that, on the day Americans get paid, they’re little more likely to spend that cash than on any other day of the week—at least if it’s on items like food and coffee. The finding suggests that tax rebates and other cash infusions may not boost the economy, as most people would probably save the windfall for a rainy day.

Researchers disagree about what people do with extra cash, says economist Matthew Shapiro of the University of Michigan, Ann Arbor. “If the standard economic theory is right,” he says, “most individuals will save almost all of a payment.” Some studies suggest, however, that people are not this rational, but obtaining data is not easy.

So Shapiro and colleagues turned to a computer and cellphone program called Check that lets users record all the money they spend. For 300 days, the researchers tracked a random sample of about 23,000 anonymous U.S.-based users who received regular payroll or Social Security payments. At first glance, the data suggested that people spend money as soon as they get it. Individuals shelled out about 70% more than average on the day a payment arrived, and they continued to spend significantly elevated amounts for the next few days.

However, this spending surge could simply mean that the users had timed regular payments like rent and tuition to their paychecks. When the team removed recurring identical payments from the analysis, it found a much lower, but still significant, postpayment peak, with people spending about 40% more after income arrived. The researchers say that even this amount could have been an overestimate, as they might have missed some recurring payments like metered utility bills that can vary from month to month.

So Shapiro and colleagues picked out a single type of spending that’s easily influenced by the perception of disposable income: cash shelled out for fast food and coffee. Here, most people's spending barely increased after a payment, the team reports online today in Science.

Still, not everyone followed this pattern. Individuals with less cash in their bank accounts increased their spending more after receiving a payment than did folks with more money in the bank. Sometimes, these people simply received less money, leaving them less able to build up reserves. Other people were simply more carefree with their money and therefore tended to spend it as soon as they got it. “Surprisingly, there are a lot of well-to-do individuals who run their credit balances up to the limit and live paycheck to paycheck—even if it’s a large paycheck,” Shapiro says.

The finding could help governments better stimulate the economy. If they could find ways to target tax rebates to people who have little cash in reserve, for example, the payments might stimulate spending more effectively, Shapiro says.

Jonathan Parker, an economist at the Massachusetts Institute of Technology in Cambridge, is impressed by the researchers’ innovative use of a novel data source. “By using administrative data,” he says, “they're able to get much more precise measurements than surveys generally provide, and a much larger sample of individuals.” Still, the volunteers are not perfectly representative of the U.S. population, he notes. For example, the researchers openly acknowledge that men use Check more than women do and are thus presumably overrepresented in their sample. The effects of this disparity are unclear, but if women were better, on average, at managing their finances than men are, it would distort the findings.